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07/2004 | Housing Has a New Face |
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by Kermit
Baker, PhD, Hon. AIA, Despite job losses in the rest of the economy, housing had another record-breaking year in 2003. Home sales, single-family housing starts, residential fixed investment, homeownership rates, mortgage originations, refinances, and home prices all reached new peaks. The only weak spots were the uneven rental market and the depressed manufactured-housing sector.
With the economic recovery under way, the question now is whether housing will achieve a soft landing in which house prices, sales, and new construction ease rather than drop off sharply. Several factors favor this possible outcome. Housing construction appears to be in line with long-run demand, and a strengthening economy should support house prices. In addition, changes in the housing finance system have made markets more resilient and better able to adjust quickly to interest-rate movements. Although refinancing activity would drop off significantly if interest rates rise even gradually, construction would probably hold near its current pace and house price inflation would be moderate rather than turn negative. If job growth falters or interest rates spike, however, housing could be in for a rougher ride. Uninterrupted growth
Despite growing concern over the pace of development, housing construction over the next 10 years is likely to exceed that over the last decade. The Census Bureau’s newly revised population estimates imply that household growth from 2005–15 will be as much as 1.1–2.0 million more than the Joint Center for Housing Studies previously projected. Add to that the growing demand for second homes and replacements of units lost from the stock, and the total number of homes built in 2005–’15 could reach 18.5–19.5 million units. This compares with 16.4 million homes added in the 1990s. In the meantime, house prices in many areas of the country have risen considerably faster than household incomes. This rapid appreciation has raised concerns that housing is headed for a crash. Although more locations are now at greater risk of a home-price decline than a year or two ago, a sharp correction is unlikely unless the economy unexpectedly contracts. Sharply higher interest rates would, however, quickly erode affordability for homebuyers. In that case, home prices would come under pressure unless employment and income growth were strong enough to offset the rate increases. The first line of defense that potential homebuyers can take against rising rates is to choose mortgages that adjust annually or hybrid mortgages that have fixed rates for a set number of years before adjusting. While these maneuvers blunt the short-run impact of higher rates, they do expose owners to higher monthly payments if interest rates continue to climb. Demand transformed
This will only add to the already important contributions that minorities have made to housing demand in recent years. In particular, without the rapid growth in minorities, the number of renter households would have fallen during the 1990s. Instead, the renter population increased modestly and the minority share of renter households surged from 31 percent to 39 percent over the decade. In addition to keeping rental demand from sagging, minorities also accounted for fully two out of every five net new homeowners from 1994 to 2003. Despite these strong gains, though, minority homeownership rates still lag those of whites by nearly 25 percentage points. Narrowing this persistent gap remains a challenge for both the government and the mortgage finance industry.
Although both women and minorities make up increasing shares of middle-income households, they are still over-represented in the lowest-income category. The incidence of housing problems is therefore higher among minorities than whites and among unmarried women than unmarried men of comparable ages. Housing challenges
Unfortunately, affordability pressures are unlikely to ease. Many of the low-wage jobs created by the economy do not pay enough for a household to afford (at 30 percent of income) even a modest one-bedroom rental anywhere in the country. Similarly, retirement incomes are so meager that many seniors face heavy housing cost burdens on top of escalating health-care costs. Adding to the pressures on low-income households is the cost of supplying new affordable housing. Restrictive regulations and public resistance to high-density development make it difficult to replace or add lower-cost units. Prospects for additional income supports or housing subsidies are equally bleak. As the federal deficit balloons, the calls to cut spending on social and housing programs are growing even as the demand for and costs of these programs continue to escalate. Copyright 2004 The American Institute of Architects.
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